SEC Tightens Rules on Credit Rating Agencies, Asset-Backed Securities

The new requirements for credit rating agencies registered as NRSROs would:

• Establish requirements to strengthen NRSRO internal control structures.
• Establish stronger conflict of interest requirements
• Establish new procedures designed to protect the integrity of rating methods.
• Create enhanced “look-back” review policies and procedures to determine whether a credit analyst’s prospects of future employment influenced a credit rating and increase the public disclosure of credit rating performance.
• Enhance disclosure requirements for issuers and underwriters of asset-backed securities (ABS) with respect to their use of third-party due diligence services.
• Establish certification requirements for providers of third-party due diligence services with respect to ABS.
• Establish training, experience and competence standards for those who participate in the credit rating process.

The newly adopted rules for asset-backed securities revise the disclosure, reporting and offering process for ABS to enhance transparency and better protect investors in the securitization market.

The new rules would provide enhanced disclosures to allow investors to make informed investment decisions, reduce the likelihood of undue reliance on credit ratings, provide investors more time to review and consider a securitization offering, and provide mechanisms to assist in enforcing the representations and warranties made about the underlying assets.

The ABS rules: 

• Require specific loan-level disclosure for securitizations of certain assets, such as residential and commercial mortgages and automobile loans and leases, and provide this information in a format that is more easily analyzed by investors.
• Revise the eligibility criteria for using an expedited offering process known as “shelf offerings.”
• Make revisions to ongoing reporting requirements.

Other changes, according to the SEC, would include allowing for a pay-as-you-go registration fee alternative, standardization of certain static pool disclosure and revisions to the definition of an “asset-backed security.”

As the SEC explains, during the financial crisis, ABS holders suffered significant losses and areas of the securitization market — particularly the nongovernmental mortgage-backed securities market — have been relatively dormant ever since.

The crisis revealed that many investors were not fully aware of the risk in the underlying mortgages within the pools of securitized assets and unduly relied on credit ratings assigned by rating agencies, and in many cases rating agencies failed to accurately evaluate and rate the securitization structures.

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